FEBRUARY 15, 2011

By M S Vasan

CBEC issued a circular No.120/01/2010-ST dt. 19/1/2010 (FNo.354/268/2009-TRU) to expedite the Service Tax refund claims of Exporters. The Circular clarified various points and gave a clear direction to the field formation , as to what they should do for various input services. The circular mainly addressed the issues of Call Centre and BPOs' who face a lot of difficulties in getting refund of Excess Credit of Service tax. The circular has been issued in the context of refund of service tax paid on input service used for providing output service.

It clearly articulated that the purpose of Notification No. 5/2006 CX (NT) is to refund the accumulated input credit to exporters and zero-rate the exports. Accumulated credit and delayed sanction of refund causes cash flow problems for the Exporters.

Further, the circular specified clearly certain services :

++ Rent a Cab and Outdoor Catering services rendered by BPO / Call centres should be allowed as Input Credit , given their nature of business

++ Manpower recruitment agency services

++ Renting of premises

++ Right to use software

++ Maintenance and Repair of equipment

++ Telecommunication facilities

Also, the circular stated that the nexus should be interpreted in a harmonious manner. The circular also guided on how to apply the nexus test , as the absence of such input / input service adversely impacts the quality and efficiency of the provision of service exported should be considered as eligible input or input service.

Given all the above, which could be provided by the Apex Board for Service Tax matters, the Chief Commissioner / Commissioner of Service Tax deny Input Credit for Rent-a-cab and Outdoor Catering itself, stating that it is only a luxury and not impact the efficiency of the output services for BPO / Call Centres. Also, it does not have any direct nexus to output services rendered. Even without that, the output services can be performed.

The Assessees are informed that Cenvat Credit in respect of Rent a Cab Service and Outdoor Catering Service is not eligible for refund in terms of latest/ subsequent judgements. One fails to understand where is a judgement adjudicating Rent A Cab and Outdoor Catering Services for BPO / Call Centre operators as ineligible input service for refund under Cenvat Credit Rules.

The Apex Court in the case of Maruti Suzuki Ltd., has held that the services having nexus or integral connection with the manufacture of final products as well as the Business of manufacture of final product would qualify to be input service under Rule 2(l) of Cenvat Credit Rules, 2004

CESTAT, Chennai , in the case of CCE, Chennai Vs. Sundaram Brake Linings Ltd., and others (2010-TIOL-863-CESTAT-MAD) has held that outdoor catering does not meet the test that without the use of the said input service, the final product cannot emerge. Hence, Outdoor catering service is not an eligible input service for Cenvat Credit. In 13 cases adjudicated together by CESTAT, the ratio of Supreme Court decision in the case of Maruti Suzuki has been interpreted restrictively.

Bombay High Court has adjudicated in the case of CCE, Nagpur Vs. Ultratech Cement Ltd., (2010-TIOL-745-HC-MUM-ST) that the definition of input service should be read as a whole. It not only covers services which are directly or indirectly used in or in relation to manufacture of final product, but includes other services which have direct nexus or which are integrally connected with the business of manufacturing the final product. In this case, the use of outdoor catering services is integrally connected with the business of manufacturing cement and therefore, credit of service tax paid on outdoor catering services would be allowable. In this case, Maruti Suzuki's case has been interpreted holistically, giving a wider meaning to the input service.

Input Service is very wide and covers not only services, used by a provider of taxable service for providing an output service or which are directly or indirectly used in or in relation to the manufacture of final products and clearance of final products, upto the place of removal , it includes activities relating to business such as ..

Activities relating to the business is not restrictive. It is not merely an activity of raw material to finished products. In the case of Service providers, it starts from planning, organizing, staffing, training, provision of services, quality assurance, process improvements, technology upgradation, marketing support and new business. It also covers the Trade Practices followed by each of the industries in that domain.

In the case of IT/ITES and other factories in the outskirts of the city, it is a practice to hire transporters to pick-up and drop the employees to engage them in the business carried on , by the Assessee. It is a way of retaining the employees and comforting them to perform effectively and efficiently. Also, the BPO / Call Centre function 24x7, round the clock. Neither transport nor food is available to their shift timings which is tuned to the global Customer calls / needs. Hence, it is very much essential to provide Transport Services and Catering Services for the employees who perform the output services in IT / BPO and call centre operations.

The CESTAT, Chennai has clearly expressed that the CBEC circular is very much applicable for the service providers and not applicable to manufacturers when questioned the validity of the Circular.

The Circular issued by CBEC should be binding on all the lower level officers including Chief Commissioners and Commissioners. By rejecting the very basic aspects mentioned in the Circular, it is as good as questioning the validity of the Circular issued by the Apex Body, CBEC and its authority on issuance of circulars / clarificatory circulars to the field formation.

Let another circular be issued by CBEC clarifying the stand, in the light of various court decisions , to avoid the field formation , forming their own opinions. Once again , it is going to result in hardship to the Assessees / Service Providers who 100% export services and claim refund of the input service tax.

(The author works as Associate V-P with Sutherland Global Services Pvt Ltd)